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I would appreciate hearing from anyone that has dealt with a situation similar to the following: Parent owns home and is currently renting to tennant. Home has 7 years worth of mortgage payments remaining. Parent wants to transfer title to Daughter and Daughter will take over mortgage payments. Both Parent and Daughter want to avoid adverse tax consequences for home sale, gifts, etc. Any suggestions? Thanks in advance.
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I would appreciate hearing from anyone that has dealt with a situation similar to the following: Parent owns home and is currently renting to tennant. Home has 7 years worth of mortgage payments remaining. Parent wants to transfer title to Daughter and Daughter will take over mortgage payments. Both Parent and Daughter want to avoid adverse tax consequences for home sale, gifts, etc. Any suggestions?

Just one: don't do it!.

We might be able to give some advice if you tell us what your goal is.

Phil Marti
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The goal is for the parents to transfer the home to their daughter. The parents live elswhere and were considering moving back to the house for retirement. They no longer want to retire to the house and are not in need of the home sale proceeds and therefore would like to provide their daughter with a house as she is currently renting.
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The goal is for the parents to transfer the home to their daughter. The parents live elswhere and were considering moving back to the house for retirement. They no longer want to retire to the house and are not in need of the home sale proceeds and therefore would like to provide their daughter with a house as she is currently renting.

If the parents sell the house to the daughter, they have an income tax liability. If the parents give the house to the daughter, they have a gift tax liability, although their unified credit may mean that there's no gift tax actually paid. Since the parents ought to do some estate planning, or revise previous plans since their retirement location has changed, I suggest consulting an estate planner with this.

Phil Marti
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<< The goal is for the parents to transfer the home to their daughter. The parents live elswhere and were considering moving back to the house for retirement. They no longer want to retire to the house and are not in need of the home sale proceeds and therefore would like to provide their daughter with a house as she is currently renting. >>

The parents can make use of a special kind of trust called a Qualified Personal Residence Trust (QPRT). The parents would place the house in a QPRT and name the daughter as the beneficiary. They would specify a length of time for the trust to exist (i.e. 5 years, 10 years, etc). At the end of the trust period, the house passes to the daughter without any income tax or gift tax consequences. There are two things to note however:

1) The value of the house is discounted at the time it is put into the trust, and the longer the trust term, the bigger the discount. For example, if the house is worth $400,000 when the trust is established and the trust is for 10 years, the value of the house in the trust (and in the beneficiary's hands when the trust ends) may be $300,000. If the term of the trust is 20 years, the value of the house may be $200,000. These are just guesses on the discount. The discount is determined using IRS actuarial tables.

2) Here's the big thing: If the parents are still alive when the trust term ends, the house goes back to them and it would basically be as if the trust were never established at all. So you might be tempted to give the trust a long life to outlast the parents. However, by doing so you will be subject to a big discount as described above.

Obviously you need to consult an estate planning specialist if you plan to do this. It is a very viable option and can be a great tax/estate planning tool (in fact I am thinking of setting one up for my father's house).

Good luck.
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